Chicago banking and financial services concern Northern Trust Corporation (Nasdaq:NTRS) reported third-quarter earnings last week that disappointed investors. The company's stock price struggled a bit after the financial results were released, but it still continues to reflect the fact that Northern's business model is well-respected and has more than hung in there during a period of high uncertainty in the banking industry.
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Third-Quarter Results
Northern's third-quarter revenues fell 1% to $927.6 million. Northern's Corporate & Institutional Services (C&IS), which provides asset servicing and management as well as custodial services to larger institutions, saw an impressive revenue gain of 27% to $310.2 million to account for just under a third of total quarterly revenue. However, custody and fund administration fees fell 9% to $150.4 million.
Total fee-related income grew 1% to $679.4 million to account for 73% of quarterly revenues. Net interest income accounted for most of the rest of the top line and fell 7% to $248.2 million as net interest margins condensed to 1.54%, down eight basis points year over year. Provisions for credit losses more than doubled, but only came to $60 million and helped net income turn positive after a loss in last year's third quarter. Overall diluted earnings came in at 77 cents per share to fall short of analyst expectations.
Rivals
State Street (NYSE:STT) is a key rival of Northern and posted a 14% decline in servicing fees during its most recent quarter as assets under custody fell 2.8% to $17.9 trillion.
The Bank of New York Mellon (NYSE:BK) has a similar focus and saw custody assets fall 1% to $22.1 trillion as new business offset pressure on existing accounts. In comparison, Northern ended the quarter with $3.6 trillion in assets under custody, up 11% from the prior year's quarter on strong international trends.
Winning Strategy
Northern boasted a quarter-end Tier 1 ratio of 13.2% to demonstrate it remains well capitalized against any further calamity in the banking industry. The company's emphasis on fees, be it from the custody of assets or management of assets for institutions and wealthy individuals, sets it apart from more traditional banks that rely on lending activities and earning a spread from interest paid on deposits. It also does not stray from its core competencies, which is something that banks such as Key Corp (NYSE:KEY) and Marshall & Ilsley Corp. (NYSE:MI) could learn from as they strayed into regions that were hard hit by residential and commercial lending difficulties.
Bottom Line
This business model has served Northern Trust well throughout the Credit Crisis. Bank of New York has also done well in a challenging environment, though State Street got caught up in a number of subprime investments that have since gone sour and have hit its shares and reputation. The flip side to this of course is that Northern's stock price and valuation have held up well. At the current stock price, Northern is trading at a forward P/E multiple of just under 17, a price-to-book ratio of over two, and sports a modest dividend yield of 2.1%. (For more, see Banking Profits In Bull And Bear Markets.)
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